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With great fanfare, President Joe Biden signed into law the Inflation Reduction Act.
Historians might one day say that this legislation did more to complicate an already over-complicated tax code than any tax bill in the past 50 years. It is now up to the Internal Revenue Service to administer this law, and even with increased funding, it is not ready for the task – and, if the past is prologue, it may never be.
The law raises taxes by some $300 billion over the next decade, primarily by creating two new corporate taxes. The first is a 15% tax on a corporation’s book or accounting income if the tax liability it reports to the IRS is zero. The law now requires companies to calculate their tax payable twice, as if doing it once was not restrictive enough.
The second corporate tax hike is a new excise tax on the redemption of corporate shares. Excise duties are special taxes on specific products, such as cigarettes. They are generally collected in order to discourage the consumption of these products or to mitigate their harmful effects.
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These new taxes will be extremely difficult for the IRS to enforce, and they come at an economic cost.
The Tax Foundation estimates that these new taxes will shrink the long-term size of the US economy by 0.2%, kill 29,000 jobs and do nothing to bring inflation under control. Admittedly, these are milder effects than those of the original Build Back Better Act, but the impact of the complexity of this bill could be much larger and more difficult to measure.
These new taxes are being used to pay for 26 new or expanded tax subsidies for various climate and energy industries, at a cost of approximately $260 billion over the next decade.
Each of these expanded credits will come with its own complex rules and regulations dictating who is eligible and for how much.
The IRS has failed to address key issues for nearly 40 years
As the complexity of our tax code continues to grow exponentially, the challenge of its administration also increases. This begs the question: is the IRS ready?
Lawmakers have approved about $80 billion in new spending for the IRS. Apparently, the majority of these funds will be used to strengthen law enforcement activities. It’s expected to bring in an additional $205 billion over the next decade, according to the Congressional Budget Office.
But will more money for the app be enough?
Let’s not forget that the IRS is the agency that had to rush to hire 5,000 new workers this year to deal with the backlog of 23 million paper tax returns that had built up over the past two seasons of production. A recent photo in The Washington Post showed the cafeteria at the IRS facility in Austin, Texas, filled with paper tax returns awaiting processing. The article says this justifies why the IRS needed $80 billion in new funds.
But these arguments ignore the fact that the IRS has failed to address these issues for nearly 40 years.
In 1986, the IRS launched a multi-billion dollar effort to modernize its outdated computer systems to reduce its reliance on manual entry of paper returns. Nearly a decade later, in 1995, the then-General Accounting Office of Congress reported that “IRS efforts to modernize tax processing are in serious jeopardy due to persistent management and technical weaknesses that hamper modernization efforts.
In 2000, the Treasury Inspector General for Tax Administration reported that the IRS, having spent over $3 billion, was unable to handle the modernization process and had to contract it out to a private contractor. Since 2000, the IRS has spent more than $4.8 billion, adjusted for inflation, on upgrading technology and “business services.”
Outdated technology remains a drag on the IRS
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Certainly, some of these investments have improved the ability of taxpayers to file their returns electronically and the IRS to manage those returns and flag questionable entries. In 2000, only 16% of tax returns of all types — personal, business, employment and excise — were filed electronically. In 2021, 78% of all returns were filed electronically; 90% of personal returns are filed this way. Taxpayers using commercial software such as TurboTax now do the work for the IRS.
Yet, in an age when many taxpayers can file their tax returns on a cellphone, the IRS still lacks the technology to digitize paper returns and must manually enter them as was done in the 1960s, 70s. and 80. As the Washington Post article noted, many IRS computers still run computer language written in the 1960s.
The IRS and its advocates say many of the problems are due to underfunding and staff attrition.
In all honesty, the IRS budget hasn’t changed much in the last 20 years after adjusting for inflation. Its budget in 2021 is about the same as in 2001 in today’s dollars. In addition, the numbers have decreased considerably over the decades. In 1991, when the technology modernization program began in earnest, the IRS had over 114,000 full-time employees. Today it has about 75,000.
But, in the same way that ATMs cut bank staff and self-checkouts made buying groceries faster, electronic filing and technology made the IRS slightly more efficient. According to the IRS’ own account, it cost 56 cents to raise $100 in tax revenue in 1991. Today, it takes 35 cents to raise $100.
Despite these modernization efforts, the IRS is still far behind the technological curve, and tax complexity compounds these problems. The Inflation Reduction Act does not solve these problems; it adds a lot to them.
Under the weight of an increasingly complex tax system, the IRS is not an agency that can fix itself, and Congress is pumping money into it for new technology and thousands of new auditors without structural reform. won’t do the job.
— By Scott Hodge, Chairman Emeritus and Senior Policy Advisor at the Tax Foundation